Global markets trip on US, Euro woes

Stock markets tumbled worldwide as fears that fractious domestic politics in the US could derail President Obama's latest attempt to jolt the world's largest economy back on the growth path. A US slowdown will immediately hit India's export driven sectors, especially information technology.

Stock markets tumbled worldwide as fears that fractious domestic politics in the US would derail US President Barack Obama's latest attempt to jolt the world's largest economy back on the growth path.

The Indian bellwether index, the BSE Sensex, slid nearly 300 points on Friday to close below the 17,000-point mark, snapping a nascent three-day old rally. The National Stock Exchange's 50-share Nifty also ended down 93 points at 5,059.45.

Stock markets are considered a leading indicator of the state of the world's economy, since brokers 'discount' the impact of developments they expect in the future.

On a rainy Friday, the barometer was set firmly on 'stormy'. World stocks rattled downwards on Thursday night and Friday, as doubts whether US lawmakers would actually allow Obama's close to $ 450 billion stimulus package to revive jobs and growth in the US. The MSCI All-Country World Index retreated 1.8 per cent at 10: 29 am in New York and the Standard & Poor's 500 Index slipped 1.1 per cent, wiping out its weekly gain. European stocks plunged after signs that the upcoming meet of the G7 group of developed nations is unlikely to agree on a plan to revive faltering growth.

South Korea's Kospi, Hong Kong's Hang Seng and Chinas Shanghai Composite index all lost ground, as did Japan's Nikkei.

On the domestic front too, the news is not encouraging.

The deputy chairman of the Planning Commission Montek Singh Ahluwalia said India's September quarter economic growth is not likely to be better than the last quarterly growth of 7.7 per cent.

Brinkmanship over the size of the US Federal debt had brought the world economy to the edge of a crisis last month, as opposition Republicans - as well as several Democrat lawmakers - squabbled over raising the debt limit. The stand-off resulted in a first-ever rating cut for US debt.

The lethargy with which the US is moving to stem the downturn in its economy, which is showing increasing signs of entering into a second recessionary phase after the 2008 meltdown, sent alarm bells ringing in trading rooms worldwide of a prolonged global economic slowdown in the years to come.

Obama has proposed a $ 447-billion package of tax cuts and spending plans aimed at boosting growth and job creation in the US, late on Thursday.

Though it is expected to be positive for the global economies in the short term, it is bogged down by doubts over it getting passed by the US Congress, which is controlled by Republicans.

The US Fed chairman Ben Bernanke did not give any hints in his speech on Thursday about injections of cash into the economy, disappointing the markets.

US government bonds, which have lost their sheen after the sovereign downgrade by Standard & Poor's (S&P), have regained prominence in the wake of renewed global growth fears spurred moves to the dollar as a 'safe haven'. Also, the safe- haven German government bond prices surged, in the wake of sovereign debt fears looming.

Gold, the safe-haven asset and a hedge against inflation, has been propelled to record highs in recent months, which itself is a big sign of things to come. Gold, denominated in US$ was up at $ 1,878 per troy ounce in the US on Friday.

A global slowdown will also derail the revival in Indian exports and impact domestic manufacturing, reinforcing the slowdown spiral.

Shanu Goel, senior research analyst, Bonanza Portfolio, said, "Concerns over US economic growth led to negative sentiments for the IT stocks which witnessed heavy selling." "IT stocks dragged the market down initially. After witnessing a brief recovery of around 20- 30 points during the early afternoon session, Nifty slipped down again, this time with greater volatility to test the lows at 5045-5050. All the sectoral indices participated in the downfall," Goel added.

Interest rate sensitive sectors - banks and realty stocks - also suffered in the wake of expectations that the RBI would hike rates at its mid-quarter review next Friday. Only consumer durables stocks bucked the trend among sectors on BSE. "Sectors-wise short position was seen in banking, cement & technology," said Amar Ambani, research head- PCG of IIFL. Metal stocks fell on Friday as if there was no bottom. The BSE Metal index shed 3.16 per cent tracking the global trends. The RBI had recently expressed fears that infusion of more liquidity in the US could lead to rise in commodity prices, stoking high inflation in the Indian economy again.

Foreign institutional investors, who were showing interest in the Indian market over last few sessions, too turned negative. They unwound positions by Rs 428 crore on Friday. But still they are net investors in September till date with over Rs 1,500 crore. However, domestic institutions were net buyers of stocks worth Rs 85 crore.

"The medium term trend still remains positive and a dip towards 4,930 should be seen as retracement rather than a major trend reversal," said Ambani.

However, market participants are favouring light positions ahead of key events like RBI policy meet and IIP numbers next week.

"We expect the market to outperform its global peers and head back to 5,350 after the recent correction," Ambani said.